Buying a Home With Student Loans: What College Graduates Need to Know

Buying a home with student loans

Graduating from college is an exciting time, full of amazing new opportunities and changes. With luck, you’ll be able to find a well-paying job in your field relatively quickly after graduation, providing you with the funds you need to reach your financial goals.

One of the most common financial goals for college graduates is to be able to buy a home. (After all, nobody wants to spend their twenties and thirties living out of their parents’ basement if they don’t have to.) But for many college graduates with student loans, there can be a lot of questions:

  • Can I afford a house with my student loan debt?
  • What steps should I take before I start to think about buying a house?
  • Is buying a house even worth it?

To help answer these and other questions, below is a series of steps college graduates should take before they begin the homebuying process, alongside some helpful tips to help you think about buying your first home.

Steps to Take Before Buying a Home

1. Make sure you’re tracking your student loans.

Before you even think about buying a home or making any other major purchase, if you relied on student loans to fund your college education, it’s really important that you are keeping track of them.

Keeping track of your student loans is crucial, for a number of reasons:

  • You’ll know exactly how much you owe
  • You’ll know how you’re faring with repayment
  • You’ll know whether your loans are in deferment, forbearance, or a grace period
  • You’ll know the interest rates of each loan
  • Etc.

All of this information will help you prioritize which loans you’ll start to pay off first, and can help you make major decisions around which repayment plan you’ll enroll in, which repayment strategies you might pursue, and whether things like consolidation or refinancing makes sense for you. Luckily, this is as easy as downloading a spreadsheet (like our free one here) and updating it as you make your monthly payments.

2. Create an adequate emergency fund.

The next financial step you should take after graduating from college is to create an emergency fund, which is essentially a savings account dedicated to seeing you through unexpected emergency expenses like a surprise medical bill.

You should begin building your emergency fund as soon as you’ve landed a job, and before you begin prioritizing other goals like paying down your student loans or saving for a home. Something that many aspiring homeowners don’t always understand is that houses require maintenance, and a surprise burst pipe or other emergency can be expensive to fix out of pocket. Having an adequate emergency fund is crucial.

Most experts recommend that you save at least three to six months of expenses in your emergency fund, which would be enough to help most people through a period of unemployment. You can download our free emergency fund calculator here to figure out how much you need saved.

3. Create a budget.

Creating a budget will allow you to understand not only how much money you have coming in every month, but also how you are spending your money. This will help you identify areas where you can cut back so that you can redirect some of those savings toward your other financial goals, like paying down your student loans and saving a down payment for your home. This can also help you understand how much money you really have in your budget for paying a mortgage when you do eventually buy your home.

There are a lot of different budgeting strategies that you can try, and no one strategy is better or worse than the other. Play around and find the one that works for you! You can download our free budgeting templates here.

What To Know About Buying a Home

There are many factors to consider when buying a home, especially right after college, so here are a few key things you should know before you begin.

1. You can save more money buying a home compared to renting.

One thing many college graduates may not know is that you can actually save more money in the long run by buying a home rather than renting. Purchasing a home may seem like a daunting task, but it might make more sense financially. Especially if you move to a big city, expensive rent prices can often cost the same as a mortgage payment.

Even if you don’t plan to live in one location for an extended period of time, it still might be more beneficial to buy a home rather than rent due to the financial advantages. Buying a home can be a good investment that helps you build up equity. This means that instead of making your landlord rich, you begin building wealth of your own.

2. You need a good credit score.

For most people, buying a home will involve borrowing a mortgage. To get the best deal on a mortgage, it’s really important that you have the best credit score possible.

Lenders use your credit score to indicate whether you’re likely to pay your loan on time, and it also determines if you’re eligible for a loan and what kind of interest rates you’ll get. Usually, people with good credit scores have access to the best interest rates, which will save you more money overall.

If you haven’t already, take the necessary steps to build your credit score and make sure it’s in good standing to ensure you’re qualified to buy a house.

It’s also a good idea to try to pay down any outstanding debt before you apply for a mortgage. While it might not be possible to pay off all of your debt, especially if you have student loans, lowering your debt levels will improve your credit score and make it more likely that you will qualify for a mortgage. Even if you can’t pay off your student loans, try to settle smaller debts and pay your student loan payments on time to boost your score.

Keep in mind that if you have too much debt, you won’t qualify for a mortgage, so plan accordingly (and don’t max out your credit card at happy hour).

3. It’s okay to start small.

Buying a home doesn’t mean you need to live there forever. Most people think your first home needs to be your dream home, but it’s completely okay, and often a better financial decision, to purchase a smaller home as a first step. This is often called a starter home.

Research what kind of home suits your current needs and review your income and expenses to determine what you can afford. If you still have student loan debt, make sure you have an organized plan to manage your loan and mortgage payments. You should consider the added costs of insurance, property taxes, and maintenance into your budget as well.

Should your financial circumstances unexpectedly change, there are resources and methods available to help maintain your original payment plan, and possibly lower your mortgage payments to free up more money to contribute to new financial demands. Refinancing with a no-closing-cost refinance for example, can be a great way to secure a lower interest rate than when you first bought your home. This can help you pay less in interest over the lifetime of your loan.

Overall, avoid purchasing a house that is too expensive, and be willing to compromise on certain home features. Your first home doesn’t need to be your forever home, and you can always sell or rent it out if your needs change.

4. You need to have money saved up.

This may seem obvious, but you need to have money saved up to buy a home. You don’t need to pay for the house in full, but you should have enough money for a down payment.

What this down payment looks like will depend on the type of mortgage you qualify for. Some people can get a mortgage for just a few percent down payment or even zero percent down with a government-backed loan, but this isn’t usually recommended because it increases what you’ll pay in the form of interest over the life of your loan.

Instead, most experts recommend that you aim to save between ten and twenty percent of the home’s value as a down payment. This means that you’ll have a lot more equity in your home right from the start, you’ll pay less in interest (since your mortgage will be lower), and you’ll avoid other costs like mortgage insurance.

Bear in mind, too, that you’ll need to cover closing costs and other fees on top of your down payment.

The Bottom Line

If all of this feels overwhelming, don’t worry. Yes, buying a home is an expensive endeavor, and yes, saving up a down payment will take some time. But as long as you’ve laid the groundwork of good financial health before you start trying to buy a home, you can (and will!) reach your goals.

About Tim Stobierski

Tim Stobierski is the founding editor of Student Debt Warriors. A freelance writer and editor with a passion for teaching people about all things personal finance, his goal is to help parents and students tackle their student loan problems so that they can live happier, healthier lives. Tim's writing has appeared in a number of publications, including The Huffington Post, The Hartford Courant, Grow Magazine, and others. His first book of poetry, "Chronicles of a Bee Whisperer," was published in 2012 by River Otter Press.

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